In 1996, Congress curtailed state-level regulation of securities offerings, or so-called “blue sky laws,” by preventing states from setting their own registration and qualification requirements for nationally traded stocks and mutual funds.
By preempting state blue sky laws, the National Securities Markets Improvement Act of 1996 (NSMIA) simplified the registration requirements of most nationally traded securities. Although the NSMIA has helped improve market efficiency and reduce confusion, it does not exempt broker-dealers from all state securities regulations. In fact, broker-dealers still face a web of requirements across the country—and failing to comply with them can cause significant legal and financial headaches.
NSMIA: A Brief Overview
Under the NSMIA, a state cannot enact or enforce any law, rule, regulation, or order requiring registration or qualification of a “covered security”.
The NSMIA established a set of nationally traded “covered securities,” including:
- Securities listed or approved for listing on national securities exchanges like the New York Stock Exchange (NYSE) or NASDAQ.
- Securities issued by investment companies registered under the Investment Company Act of 1940.
- Securities sold to qualified purchasers. (A qualified purchaser may be defined differently depending on the category of security.)
- Securities offered via certain exempt offerings or transactions.
States are also prohibited from establishing capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for broker-dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from or supplement federal requirements.
NSMIA allows brokers to conduct de minimis transactions for existing clients in a state, even if they are not registered there, so long as:
- they are registered with FINRA and another state;
- the broker is not ineligible to register in the state; and
- the customer has been doing business with the broker’s firm for 30 days and with the broker for 14 days.
Exceptions to NSMIA
The NSMIA definition of a covered security is intentionally broad and includes most nationally traded securities offered in the United States. A few exceptions remain, however. States and the federal government retain dual regulatory power over securities that trade over-the-counter, Rule 504 and 505 offerings, and Regulation A offerings.
Even securities that are covered are not entirely exempt from state-level notice filing requirements. For example, states may require any document filed with the U.S. Securities and Exchange Commission to be filed at the state level, along with annual and periodic reports of the value of securities sold to persons located in the state, solely for notice purposes and the assessment of any fee. A state may also determine its own the timing and fee requirements. Accordingly, even those offering covered securities should review and comply with state blue sky laws.
States also maintain their own antifraud and compliance requirements and enforcement mechanisms. Failing to submit state-level filings or fees allowed under NSMIA gives state officials the right to suspend an offer or sale of securities within their state. Moreover, states retain important anti-fraud powers under the law. They have the authority to investigate and institute proceedings for improper sales practices by both firms and individuals.
While NSMIA standardized the approach to securities regulation in many ways, broker-dealers and other investment professionals should proceed with caution where state-level requirements are concerned. They would be well advised to seek expert advice from experienced counsel who understand the rules in each jurisdiction and who can help limit regulatory and financial exposure.
To learn more NSMIA, blue sky laws, and broker-dealer requirements, contact us for a consultation.